Natural gas’s implied volatility

On July 6, 2017, natural gas’s (UNG) (BOIL) implied volatility was 33.4%, on par with its 15-day average.

Generally, natural gas (GASX) (UGAZ) futures and implied volatility move inversely. The above graph illustrates this inverse relationship. For example, in the week ended July 6, 2017, US natural gas active futures fell 5.1%, and their implied volatility rose 5.5%. We discussed the factors that contributed to the fall in natural gas prices in part one of this series.

In another such example, implied volatility spiked to 54.5% in March 2016. In the same month, natural gas active futures settled at their 17-year low. Since then, natural gas prices have gained ~76%, while their implied volatility fell 38.7%.

Natural gas’s price range forecast

In the next seven days, US natural gas August futures could settle between $2.76 and $3.02 per MMBtu (million British thermal units). This range forecast assumes that natural gas prices are normally distributed with a standard deviation of one, using natural gas’s current implied volatility of 33.4%. There is a 68% probability that natural gas prices will close in this price range in the next seven days.

On July 6, 2017, US natural gas active futures closed at $2.89 per MMbtu. US rig count data could be the next catalyst for natural gas prices this week apart from natural gas inventory data, both to be released on July 7. If the US oil and natural gas rig counts rise, it could pressure natural gas prices near the $2.7 mark in the next few trading sessions.

US natural gas active futures falling could negatively impact ETFs such as the United States Natural Gas Fund LP (UNG) and the Direxion Daily Natural Gas Related Bull and the Bear 3X Shares ETF (GASL).

Read our weekly coverage of natural gas to know more about the energy commodity.